Federal Risk Retention Law Needs Clarification: Congressional Report

The federal law governing risk retention groups should be clarified to reduce the number of disagreements between RRG managers and state regulators and to clarify the coverage RRGs may offer, a Congressional report advises.

The Government Accountability Office said varying interpretations of the federal Liability Risk Retention Act of 1986 (LRRA) have led to uncertainty and disagreements among RRGs and state insurance regulators.

The GAO said clarifications might address whether non-domiciliary states can impose requirements or fees on RRGs beyond those rules and premium taxes currently specified in the federal law. It said Congress may also wish to provide a more specific definition of the types of insurance coverage RRGs are permitted to offer under LRRA.

First enacted in 1981 and then updated in 1986, the LRRA enables groups of businesses or professionals to organize RRGs across state lines. Under the law, once licensed by their state of domicile, RRGs are to be free to operate in other states under federal law with only limited state oversight.

But the GAO found evidence of varying state regulatory practices and requirements in non-domiciliary states and disputes between state regulators and RRGs in areas such as registration requirements, fees, and types of coverage RRGs may write. For example, while some states have interpreted LRRA to permit RRGs to write contractual liability coverage, others have not, and therefore may not allow RRGs to write this coverage in their state. RRGs have challenged requirements established by non-domiciliary states that RRGs assert are not permitted by LRRA.

Some state regulators told GAO that their actions toward non-domiciled RRGs reflect their attempts to use their limited regulatory authority to protect insureds in their states as well as to address concerns about RRG solvency.

According to the National Risk Retention Association, a number of states have impeded RRGs licensed in one state when they try to operate nationally. The RRG group, along with the Self-Insurance Institute of America and the Risk & Insurance Management Society, is backing legislation (HR 2126) that seeks to remove barriers for RRGs.

Known as The Risk Retention Modernization Act, HR 2126 is sponsored by Rep. John Campbell, R-Calif., and joined by Rep. Peter Welch, D-Vt. The legislation proposes to standardize corporate governance standards, create a federal arbitration program to settle disputes with states, and expand the coverages RRGs may write to include commercial property insurance.

In 2010, more than 80 percent of RRGs were domiciled in Vermont, South Carolina, the District of Columbia, Nevada, Hawaii and Arizona, but RRGs wrote about 95 percent of their premiums outside their state of domicile.

As part of its report, the GAO surveyed state regulators. Thirty-two of 49 states responding said the federal law should not be expanded to let RRGs write commercial property insurance, while five said RRGs should be allowed to write the coverage. Twelve states offered no opinion.

States that answered “yes” said that expanding the law would allow businesses to self-insure their property exposures in the same way as their liability exposures, and would be sensible given the difficulty some businesses have obtaining property insurance. However, other states also said that non-domiciliary states should be given more regulatory authority over these entities.

States that answered “no” to letting RRGs write commercial property coverage said that this insurance is sufficiently available and RRGs may not be sufficiently capitalized to provide property insurance.

States answering “no opinion” said there is no evidence of an availability/affordability problem and that the property insurance market would be more appropriate for minimally capitalized companies.

States said that RRGs have expanded the availability of commercial liability insurance — particularly in niche markets— but differed in their opinions of whether RRGs have improved its affordability.

GAO also asked states whether they believe the LRRA needs to be clarified. Sixteen states said yes, six said no, but 27 of 40 responding had no opinion.

RRG Industry

The GAO report also provides a profile of the size and financial situation of RRG industry that shows it is generally profitable.

In 2003, RRGs wrote about $1.8 billion, or 1.17 percent of commercial liability insurance. In 2010, RRGs continued to comprise a small percentage of the total market, writing about $2.5 billion —or about 3 percent of commercial liability coverage.

In addition, the number of RRGs has increased since 2004, with the most growth occurring in health care-related lines.

In 2005, the GAO recommended more uniform state regulatory standards, including corporate governance standards to better protect RRG insureds. The National Association of Insurance Commissioners (NAIC) has since revised its accreditation standards to more closely align with those for traditional insurers that are subject to oversight in each state in which they operate. For example, all financial examinations of RRGs that have commenced during or after 2011 should use the risk-focused examination process. NAIC also has begun developing corporate governance standards that it plans to implement in the next few years.